Preannounced attributable net profit to exceed US$1.9bn in 2022 SITC International (SITC) preannounced 2022 results: Attributable net profit may exceed US$1.9bn in 2022 (up more than 63% YoY), implying attributable net profit of more than US$733mn in 2H22 (up more than 9% YoY, down about 37% HoH), in line with our expectations.
In 2H22, the China Containerized Freight Index (CCFI) composite index fell 28% YoY and 23% HoH; on Southeast Asia routes, the CCFI index slid 29% YoY and 35% HoH; grew 11% YoY and 5% HoH for Japan routes; and rose 12% YoY and 1% HoH on South Korea routes. We believe the relatively stable freight rates on Japan and South Korea routes laid a foundation for the firm to achieve positive YoY growth. However, the firm's earnings growth narrowed in 2H22, impacted by rates on other routes amid an industry downturn.
Trends to watch Watch long-term investment value of the container shipping sector as global shipping demand cools and supply concerns increase.
Supply and demand dynamics under pressure in 2023: With pressure from high inflation and destocking, shipping demand has seen downward pressure since 2H22. Clarksons expects global shipping demand to shrink by 2.2% in 2023, and global supply to grow 7% this year as new vessels are delivered .
Changes in competitive landscape increase market concerns:
According to a recent announcement by Maersk, Maersk and the Mediterranean Shipping Company both agreed to end the 2M alliance, effective January 2025. We think this may increase concerns in the market about a surplus in shipping capacity. As of January 20, 2023, the Shanghai Containerized Freight Index (SCFI) composite index has continued to fall to the level around the same period in 2020. Although new environmental regulations such as the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) may ease supply pressure, we believe we are now in a key period to watch the long-term investment value of the global container shipping industry as the global COVID-19 pandemic eases.
Asia routes may remain profitable, despite supply-side constraints.
Due to limitation of water depth at ports, and short and fast intra-regional routes, Asia routes mainly support the operations of small vessels below 3,000 TEU. As of January, the orderbook-to-fleet ratio of small vessels was lower than that of large vessels (13% for vessels below 3,000 TEU vs. 37% for those over 8,000 TEU). We expect the intra-Asia market to outperform other markets due to relatively balanced supply and demand.
However, it remains to be seen whether the reduced effective shipping capacity due to limited new ship orders can stabilize freight rates.
We believe the firm will continue to outperform the market due to service quality and a strategy focusing on routes in Asia. Amid a global industry downturn in 2H22, the firm achieved positive YoY growth, despite a high base, which we attribute to its high-quality services and high proportion of long-term contracts for routes to Japan, South Korea and elsewhere in Asia.
We think SITC’s competitiveness will be further strengthened by new low- cost self-owned vessels delivered in 2022-2025. Seven new-built vessels were delivered in 2H22 and 76% of the firm’s vessels were self-owned at end-2H22. We think new vessel deliveries along with a potential switch to smaller vessels with lower charter prices would help SITC control costs, which bodes well for strong earnings.
Financials and valuation
We keep our 2022 and 2023 revenue and earnings forecasts unchanged, and introduce 2024 forecasts for revenue of US$3.04bn and for earnings of US$897mn. The stock is trading at 4.8x 2023e and 6.6x 2024e P/E.
Maintain OUTPERFORM. We maintain our target price of HK$21.60 (6.1x 2023e and 8.3x 2024e P/E), offering 26.5% upside.
Risks
Lower-than-expected Intra-Asian shipping and trading demand; industry competition disappoints; accumulation of orders for new ships.